ACSI’s annual review of ASX200 CEO pay

In July, the Australian Council of Superannuation Investors (ACSI) published its latest survey of CEO remuneration based on FY22 disclosures including companies with 31 December financial year ends.

The main points highlighted from an analysis of the ACSI report shows that CEO pay has retreated to trends observed prior to the onset and ensuing recovery period of the pandemic. There is a continued downward trend of ASX 100 CEO pay seen in the realised value of incentives, with median and average ASX 100 CEO reported pay (total pay according to Australian regulations) down on prior. CEO average realised pay is at its lowest in the nine years ACSI collected the data. These factors culminate to highlight the extent that CEO pay is aligned with shareholders’ interests and contingent on performance.

There has been a shift towards deferral of a proportion of annual incentives into equity due to pressure from regulators like APRA and shareholders. This has kept the median CEO cash annual incentive below $1.2m since 2009. Deferral for ASX 101-200 is less common and less significant. ASX 101-200 CEO pay is on the rise, the FY22 median cash annual incentive recorded was second highest in the history of the ASX 101-200 study. Overall, the median increased by 7.4% p.a. over 10 years.

ACSI makes the point that missing an annual incentive is rare. In the report’s introduction, ACSI reiterates its belief that incentive pay should be for stretch performance. The evidence, present in analyses of realisable pay versus consensus, suggests that CEO pay actually varies with a fuller range of performance, and is not about pay for only stretch performance. We expect most workers in superannuation funds would prefer CEO pay to go down for poorer performance as well as go up for better performance, rather than not go down for poor performance. And, purely from a behavioural economics perspective, the concept of “loss aversion” suggests executives would focus on performance outcomes more if there was the threat of loss in pay, rather than just an upside (see HERE).

There are complex market conditions in play: rising interest rates, continuing supply chain pressure and increased cost of living, all affecting company performance. Some companies are proposing to lower performance requirements for executives. This is something that ACSI finds “difficult to support when providing voting advice”. This appears inconsistent with past practice, when proxy reports often reference outcomes against consensus forecasts. These may predict a downturn, and, if performance pay is based on consensus, investors, including ACSI investors, tend to be supportive.

A summary of ACSI’s findings follows.

Realised pay

Realised pay is where many focus and is an indicator of the pre-tax cash that could be realised by a CEO including vested equity-based incentives. ACSI values share rights as at the vesting date, but options when they have been exercised. As we have noted in the past, this is an inconsistency between the treatments that could be addressed either using an intrinsic value at vesting or fair value at vesting. ACSI’s calculation of realised pay is flawed as it assumes rights vest and are exercised at the same time using face value as opposed to fair value. A summary of their findings:

  • Average realised pay for ASX 100 CEOs dropped to its lowest point in the nine years that ACSI has collected realised pay data.
  • The 11 foreign-domiciled company CEOs collected almost three times more pay on average, largely due to ResMed ($47m) and News Corp ($35m) CEOs.
  • Low cash values can mask high overall pay with large amounts of equity vesting in FY22 backed by strong share price performance.

Reported pay

Reported pay is the data provided in the statutory table (accounting standards) format and is a like-for-like comparison of the pay elements.

Reported pay includes cash annual incentives which remained near flat in FY22 for ASX 100 CEOs.

ASX 101-200 CEOs saw a significant increase in average reported pay, a trend seen across the last decade. This is evident despite high pay CEOs leaving the sample as incumbent ASX 101-200 CEO’s median and average values remain high.

  • ASX 100 was slightly up from the previous year at around $4.6m at the median and $5.2m average
  • ASX 101-200 was around $2.26m at the median and $2.7m average (5.0% p.a. growth over the 10 years)

Fixed remuneration

Fixed pay for CEOs dropped after the surge in FY21 and retains the downward trend prior to FY20. Some of the apparent declines are due to changes in the sample and movement in CEO leave balances.

The overall picture was that long-term ASX 100 CEO median fixed pay has fallen 1.1% p.a. and average fixed pay by 0.6% over the 10 years FY12 to FY22. This is the result of new CEOs starting at lower pay levels than their predecessors in addition to minimal annual increases for incumbent CEOs. Median fixed pay for the ASX 100 CEO sample in FY22 of ~$1.75m was at its lowest level in the past 10 years.

The median fixed pay for ASX 101-200 CEOs has largely kept in line with inflation until FY22. ASX 101-200 CEOs fixed pay is rising, the median increased by 1.4% and average by 1.1% p.a. The highest fixed pay in the ASX 200 sample was part of the ASX 101-200 cohort and the only CEO to receive above $3m. Mainly due to accrued leave payouts.

The data analysis is laid out in the report though as a summary, CEO fixed pay in FY22 for:

  • ASX 100 was around $1.75m (median and $1.80m average); and
  • ASX 101-200 of $1m (median and $1.1m average).

Short term incentives

Median STI (as a proportion of the available maximum) has fallen to levels close to trends observed prior to COVID. FY21 recorded peak STI 76.7% dropped to 71% which is still significant.

The other highlights are:

  • ASX 100 zero annual incentive outcomes fell to 1% (FY21: 7%).
  • Three ASX 100 CEOs received a maximum annual incentive in FY22 (FY21: 6).
  • Twelve ASX 101-200 received a maximum annual incentive in FY22 (FY21: 16).
  • Two CEO’s received maximum STI outcomes for four consecutive years.

The summary following recovery:

  • ASX 100 CEOs median of $1,722,456 and average $2,261,920
  • ASX 101-200 CEOs median of $685,434 and average of $893,766

Termination payments

Key observations were:

  • The number of terminations decreased to 15 in FY22 (FY21: 17) with 8 above $1m (FY21: 12). But larger payouts were granted with 2 above $5m.
  • Total cost to shareholders has decreased to $28m in FY22 compared to $32m in FY21 albeit across less CEOs (FY22: 15, FY21: 17).

To view ACSI’s full report, see HERE.

© Guerdon Associates 2024
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